"First, among the "very large stocks," representing over 40% of Nasdaq trading activity, the report showed the effective spreads are 'nearly equal' across the markets" Ketchum explained. "Their data actually showed that Nasdaq stocks in this category had lower spreads by an average of 1.2 cents per share - though they did not consider that difference to be statistically significant. Nasdaq's strong performance among the top stocks in this study highlights the many market enhancements we have implemented over the last five years. These enhancements have brought spreads down by over 75% since 1996. Today's study highlights this progress. It is the first time, to my knowledge, that an independent economic study has produced this kind of finding."
"Second, market order executions were found to be 'generally faster' on Nasdaq than the NYSE for 100-499 share orders. Since this is an order size frequently used by retail investors, we are pleased to see this finding."
"Interestingly, our read of their analysis suggests that the more competition that exists to execute an order, the better the result for investors. Clearly this argues for the Nasdaq system that links market participants (i.e., Market Makers and ECNs) and allows them to compete for orders. A major finding of the report is that among very large stocks the spreads are 'nearly equal'. Nasdaq's top stocks have an average of 59 Market Makers, making trading for those top stocks the most competitive (or, as the SEC would term it, fragmented) of all. Smaller stocks have fewer Market Makers. This suggests, ironically perhaps, that the more competition that there is for orders (i.e., the more market participants) the better the spread execution."
Areas of Nasdaq Concern
"We do have several concerns about the report methodology that we have communicated to the SEC and that deserve further study. For example, as the report itself notes, "…there is no single all-encompassing measure of execution quality." The report overly focuses, we believe, on effective spread as the singular measure of execution quality, which is a narrow view and does not completely present the true picture of today's markets. Execution quality is multi-dimensional with many important factors to measure including spreads, trading cost, speed of execution, liquidity, and transparency. Nasdaq excels on all these criteria."
"Company comparisons were not always apples to apples. Nasdaq companies tend to be younger, less diversified, from quite different industries, and more growth-oriented than NYSE companies. Among these stocks, volatility of prices tends to be higher. Growth rates in stock prices tend to be higher. Since the companies across the two markets have such differing characteristics, it is not surprising that their trading characteristics are also different. It is important to emphasize, however, that these differences are in the companies themselves, not differences in the trading venue. The SEC acknowledges this in their report, stating, there is "…the possibility that the reported results are driven by the remaining differences between the stocks rather than by differences in the degree of order interaction between the two market structures."
"For more than a decade, Nasdaq has been the engine of economic growth in America and is recognized by investors for this around the world. It was created to provide an efficient market for growth leaders. Clearly, it fulfills this vision. Nasdaq is a highly efficient market for equities trading. We will continue to work with the SEC and market participants to continue to improve the market quality available to investors," Ketchum said.
SuperMontage Expected to Further Enhance Nasdaq Execution Quality
"The clearest and most direct route for the SEC to take a significant step in the interest of investors would be to approve the SuperMontage trading system. Providing an even more fair, orderly and transparent market for investors is a primary objective for Nasdaq, and we are very proud of our track record," Ketchum noted.
"Nasdaq's proposed SuperMontage market structure will lead directly to better execution quality for investors by providing improved access to available liquidity (automatic execution); greater transparency and depth, making more liquidity visible and available to all users; and a stronger center of gravity, greatly enhancing order interaction. Combined with greater quote competition," Ketchum noted. "SuperMontage will provide better prices for investors."
"Given the SEC's genuine concern and ongoing attention to quality of markets, we hope they will recognize the major contribution SuperMontage will make to the overall quality of markets, and will approve it as soon as possible. In addition, Nasdaq is moving forward with the introduction of Primex in 2001, which will provide electronically the ability for market participants to seek price improvement. We expect that these innovations, SuperMontage and Primex, will provide dramatic improvements for investors this year." Ketchum concluded.
Nasdaq is Committed to Continuously Improving Execution Quality
"Nasdaq continuously strives to improve execution quality. Such continuous improvement," Ketchum said, "is a cornerstone of The Nasdaq Stock Market."
The impact of these changes and others can be seen on the dramatic reduction in average quoted spread per stock over time, for example, down more than 75%, since December 1996.
The Result of this Commitment has been a Continuous Reduction in Spreads for Investors
The average relative spread on the Nasdaq market has fallen substantially and nearly continuously in recent years. Relative spread is the ratio of the quoted spread to the price of the stock. In December 1992, the spread was slightly above 1.70%, but it was only 0.22% in September of 2000. Since the introduction of the Order Handling Rules (in the months following December 1996), Nasdaq spreads have fallen by more than 75%. At this time, the spread for a typical share traded on Nasdaq is only 14 cents.
Nasdaq Excels on Speed of Execution for 100-499 Shares Orders
The SEC report found that "market order executions are generally faster on Nasdaq than the NYSE for 100-499 share orders.
Nasdaq believes that it also excels in execution speeds for larger orders (2000-4999). However, the above comparison excluded large NYSE floor orders and did not measure the time that these orders may have spent being handled by an NYSE member firm upstairs in its trading room. The NYSE orders that were included were the relatively easy SuperDot orders. A Nasdaq Economic Research study shows that the median execution time for Nasdaq market orders is 0.0 seconds -- the "typical" Nasdaq execution happens instantaneously. Thus, the execution time data, for large orders especially, deserves further investigation.
Nasdaq Excels on Providing Liquidity for Stock Trading
More capital is committed to Nasdaq stocks through the participation of multiple Market Makers. Nasdaq's dollar volume soared to nearly $11 trillion in the first half of 2000 -- more than double the same period for the previous year. By allowing for trading and competition among the unlimited number of market participants, Nasdaq's market structure offers an environment that facilitates greater liquidity -- the ease with which stocks can be bought and sold without dramatic fluctuations in price. Market Makers enhance Nasdaq's liquidity by providing investors with ready access to capital and uninterrupted trading in their stock, while ECNs add to the market's liquidity by bringing additional orders into Nasdaq.
One generally available measure of liquidity is the Amivest Liquidity Ratio, which measures the dollar value of trading associated with a 1 percent change in share price. A high value implies that a large number of shares can be traded with little change in share price. Since the metric is based on reported volume, the Amivest Liquidity Ratio measures liquidity for all traders in the market - both investors and market participants. Because of this, differences in degree of dealer participation may affect the comparison of the Amivest Liquidity Ratio across markets. The Amivest Liquidity Ratio fairly measures the actual traded liquidity on Nasdaq and other markets. As illustrated by the chart below, the average liquidity for Nasdaq National Market common stocks is higher than the average liquidity of comparable size NYSE common stocks. In the largest market capitalization group, liquidity for the average Nasdaq National Market common stock is two times higher than for the average NYSE common stock. In the remaining four market capitalization groups, liquidity for the average Nasdaq National Market common stock is about 40% higher than for the average NYSE common stock.
The Methodology Employed for the Report Raises Several Important Questions
As the report itself notes, " …any comparative analysis of market structure is necessarily complex." As economists and others further attempt to understand the comparisons, Nasdaq said three important areas exist where further study and analysis are warranted:
1. The SEC analysis downplays key aspects of execution quality.
The SEC's study focuses most of its attention too narrowly on effective spread as a proxy for execution quality. While that is a useful statistic, it does not reveal all the things an investor might want to know about execution quality, as follows (explained in more detail in the next section):
- Trading cost…what does it cost an investor to make a trade (effective spread alone does not tell the whole story).
- Speed of execution…how fast an investor's trade gets done?
- Liquidity…is there sufficient trading activity and stock available to meet investor's needs?
- Transparency…is the best price displayed and available to all investors?
- Yahoo of Nasdaq was matched with Proctor and Gamble of the NYSE
- Microsoft of Nasdaq was matched with Citigroup of the NYSE
- Veritas Software of Nasdaq was matched with Time Warner of the NYSE
- Amgen of Nasdaq was considered a very close match with Chase Manhattan of the NYSE
- ComCast of Nasdaq was considered a very close match with The GAP of the NYSE
- Comparing only the easy NYSE SuperDot orders with all orders on Nasdaq is highly misleading. Nasdaq provided the SEC with its audit trail data that covers virtually all trading in Nasdaq-listed stocks. The less-automated NYSE was not able to provide information about trades that were executed on its floor -- approximately half of its volume, only providing information on orders electronically routed to its specialists through its SuperDot system. Such routine orders would be expected to have low transaction costs, as compared with more complex floor based orders for which the SEC report was unable to account. Furthermore, the SEC did not even look at orders routed to the regional exchanges or to Nasdaq's Intermarket.
- Virtually every NYSE trade has a commission added to it, yet the SEC did not have commission data available. Many Nasdaq stock trades are made "flat" without a commission or at lower commission equivalents than listed securities. Not considering the real cash cost of commissions charged on NYSE trades fundamentally biases against Nasdaq any comparison that does not include commissions.
Execution quality is a primary concern at the Nasdaq. Spreads have fallen sharply on the Nasdaq market in the last decade, as competition and improved rules of market structure have spurred the adoption of new technology. Nasdaq's record in the areas of liquidity and trade execution is outstanding, with most market orders being filled instantaneously and a large percentage of limit orders being executed within a few minutes. Nasdaq's large and actively traded stocks have quoted and effective spreads that are similar to and sometimes lower than, those of similar NYSE issues. Speed and spreads are but a few of the many important dimensions of execution quality. Market improvement in all the dimensions has resulted from intense competition, providing investors quality execution in quantities never before imagined.
The Nasdaq Stock Market lists nearly 5,000 companies, has a larger dollar volume, and trades more shares per day than any other U.S. market. Nasdaq is a subsidiary of the National Association of Securities Dealers, Inc. (NASD®), the largest securities-industry, and self-regulatory organization in the United States. For more information about Nasdaq, visit the Nasdaq Web site at www.nasdaq.com or the Nasdaq NewsroomSM at www.nasdaqnews.com.
